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Conference paper 1 st national forensic conference, yaounde. [compatibility mode]

  1. 1. 1ST NATIONAL FORENSIC CONFERENCE, YAOUNDE, CAMEROON Richard Mayungbe, PhD, MBA, FICCA, FICA, CPFA, ACFE, MICM, MIPN, Ch.MC, MITD Global Financial and Management Trainer, Forensic Accountant, Fraud Fighter, Consultant and Author Tel: +23772585428, +234 8033467639, Skype: tsiltd.tsiltd 1
  2. 2. CONTENTS• DAY 1• Definition of fraud, How Fraud Occurs, Various Fraud Schemes and targets.• Psychology of fraud: what motivates the fraudster• DAY 2• Interviewing for Fraud in the Audit Process• DAY 3• Fraud Investigation• Interviewing• Free discussion on all the topics, question and answer etc 2
  3. 3. DEFINITION OF FRAUD, HOW FRAUD OCCURS, VARIOUS FRAUD SCHEMES AND TARGETS• It is a great pleasure to welcome all delegates to this brain storming conference aimed at pulling our collective wisdom together in finding effective solutions to one of Africa’s nagging problems, “Fraud and Corruption”• For the next 3 days, we shall be here together on this matter. 3
  4. 4. Definition of Fraud• There is no single accepted definition of fraud.• It is impossible to provide a comprehensive definition of fraud.• Indeed, it may be possible to distinguish between two general types of definition:• a general broader one and• a criminal narrower one.• However, all definitions have one thing in common - an element of dishonesty or deceit. 4
  5. 5. Definition of fraud.. (contd.)• There are many dictionary definitions of the word fraud each is similar but not exactly the same.• Expressions such as:• Unfair advantage by unlawful or unfair means;• Knowingly making a false representation;• Intentional deception resulting in injury to another person;• Something intended to deceive; deliberate trickery intended to gain an advantage; 5
  6. 6. Definition of fraud.. (contd.)• An intentional perversion of truth; deceitful practice or device resorted to with intent to deprive another of property or other right;• The intentional and successful employment of cunning, deception, collusion; or artifice used to cheat or deceive another person whereby that person acts upon it to the loss of his property and to his legal injury; 6
  7. 7. Definition of fraud.. (contd.)• The act of leading a person to believe something which you know to be false in a situation where you know the person will rely on that thing to their detriment;• A deception, intended to wrongfully obtain money or property from the reliance of another on the deceptive statements or acts, believing them to be true; 7
  8. 8. Definition of fraud.. (contd.)• The intentional perversion of the truth in order to mislead someone into parting with something of value• The specific legal definition varies by legal jurisdiction, but fraud is a crime, and is also a civil law violation. 8
  9. 9. Definition of fraud.. (contd.)• From the point of view of the criminal law, fraud could be defined as criminal deception, being the use of false representations to obtain unfair advantage or to harm the interests of another. 9
  10. 10. Definition of fraud.. (contd.)• To deceive is to induce someone to believe that a thing is true which is false, and which the person practicing the deceit knows or believes to be false.• To defraud is to deprive by deceit:• It is by deceit to induce someone to act to his injury. 10
  11. 11. Nine elements of fraud• a representation of an existing fact;• its materiality;• its falsity;• the speakers knowledge of its falsity;• the speakers intent that it shall be acted upon by the plaintiff;• plaintiffs ignorance of its falsity;• plaintiffs reliance on the truth of the representation;• plaintiffs right to rely upon it; and• consequent damages suffered by plaintiff 11
  12. 12. How Fraud Occurs• Fraud, like other crimes, can best be explained by three factors:• 1) A supply of motivated offenders;• 2) The availability of suitable targets;• 3) The absence of capable guardians or a control system. 12
  13. 13. How Fraud Occurs• When economic climate declines, it is likely to raise the risk of fraud.• As individuals and companies suffer financially, more people may be tempted to cross the line of legality and engage in fraud to maintain the lifestyles they had enjoyed during better times. 13
  14. 14. How Fraud Occurs• stagnant earnings,• no bonuses,• stiff competition,• irresponsive governments,• the possibility of job losses –• all of these, and more, increase the likelihood of an individual and even organisations to commit fraud. 14
  15. 15. How fraud Occurs• Smaller business are overall more susceptible because they generally don’t have as many people in place to separate job functions and put controls in place.• The culture is usually open and trusting. 15
  16. 16. Some of the Ways Occupational Fraud Occurs• Skimming cash receipts• Falsifying expense reports• Forging or tampering with company checks• Falsifying pay roll records• Falsifying bills and invoices 16
  17. 17. Some of the Ways Occupational Fraud Occurs• Stealing cash –Larceny• Stealing other physical assets• Stealing intellectual assets and information• Corruption• Financial statement fraud 17
  18. 18. Various Fraud Schemes and Targets• Fraud is as numerous as the languages under the sun!• Let us compile the most popular ones taking our source from the Association of Certified Fraud Examiners 2012 Global Fraud Study 18
  19. 19. Occupational Fraud• This type of fraud falls into 3 categories:• Asset misappropriation schemes, in which an employee steals or misuses the organization’s resources (e.g., theft of company cash, false billing schemes or inflated expense reports) The targets here are the employers, private or public. 19
  20. 20. Occupational Fraud• Corruption schemes, in which an employee misuses his or her influence in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect benefit (e.g., schemes involving bribery or conflicts of interest) The targets are internal and external clients of the organization 20
  21. 21. Occupational Fraud• Financial statement fraud schemes, in which an employee intentionally causes a misstatement or omission of material information in the organization’s financial reports (e.g., recording fictitious revenues, understating reported expenses or artificially inflating reported assets) The targets are shareholders, the investing public, banks and financial institutions, suppliers, customers, inland revenue, and many other stakeholders. 21
  22. 22. BANK FRAUDS• Bank and banking related fraud can occur in many ways from cheque fraud to credit card fraud.• Cheque Fraud is responsible for the loss of about $815 million yearly, which is nearly 12 times the amount robbed from banks each year 22
  23. 23. Bank fraud• Many types of cheque scams exist and include:• Forged Signatures – involves forging a signature on legitimate blank check• Forged Endorsement – includes endorsing and cashing or depositing a stolen check• Counterfeit Checks – is on the rise with the advancement in color copying and desktop publishing 23
  24. 24. Bank fraud• Altered Checks – where a person changes the name of the payee or dollar amount on a legitimate check• Uninsured Deposits: occurs when illegitimate companies persuade customers with high rates of interest or offshore secrecy to avoid paying taxes. These companies are not monitored or authorized by any federal bank or financial institution, meaning depositors do not receive protection or insurance on their investments from any state or federal institution 24
  25. 25. Bank fraud• Credit Card Fraud: is a common type of fraud that affects millions each year.• Statistics show that credit card causes $500 million in damages to card companies and credit card holders.• And, if you suspect that you’re a target of credit fraud contact your bank or credit card company immediately to disable your card. 25
  26. 26. Bank fraud• Falsification of Loan Applications: also known as Loan Fraud.• It occurs when a person produces false information to qualify for a loan, such as a mortgage for their house.• Sometimes, loan officers may be in on the fraud. 26
  27. 27. Bank fraud• Stolen ChecksSome fraudsters obtain access to facilities handling large amounts of checks, such as a mailroom or post office or the offices of a tax authority (receiving many checks) or a corporate payroll or a social or veterans benefit office (issuing many checks). A few checks go missing; accounts are then opened under assumed names and the checks (often tampered or altered in some way) deposited so that the money can then be withdrawn by thieves. Stolen blank checkbooks are also of value to forgers who then sign as if they were the depositor 27
  28. 28. Bank fraud• Demand draft fraud• Demand draft fraud is usually done by one or more dishonest bank employees. They remove few DD leaves or DD books from stock and write them like a regular DD.• Since they are insiders, they know the coding, punching of a demand draft. These Demand drafts will be issued payable at distant town/city without debiting an account. Then it will be cashed at the payable branch.• For the paying branch it is just another DD. 28
  29. 29. Bank fraud• Rogue traders• Fraudulent loans• Forged or fraudulent documents• Bill discounting fraud• Booster cheques• Prime bank fraud 29
  30. 30. Identity Fraud• Identity theft occurs when someone uses your personally identifying information (like your name, social security number, or credit card information) to pretend to be you.• The identity thief does this for his own personal gain at the expense of his victim 30
  31. 31. Identity fraud…contd.An identity thief may use your information to:• Open a new credit card, phone, or utilities account in your name and then run up the bills without paying them. The delinquent account then appears on your credit report.• Open a bank account and write bad cheques in your name, apply for a loan in your name, or use your bank information to drain your account. 31
  32. 32. Identity fraud…contd.• File a fraudulent tax return, or apply for government benefits in your name.• Get a drivers license with your information but his own picture on it.• Give your personal information to police during an arrest. Then when he does not show up for the court date, a warrant of arrest is issued in your name 32
  33. 33. Identity fraud…contd.• There are a number of methods a skilled identity thief may use to steal your information. These include:• Shoulder Surfing: watching you from a nearby location as you punch in your pin codes or listening as you give someone else your personal information over the phone 33
  34. 34. Identity fraud…contd.• Dumpster Diving: rummaging through your trash to find bills or other documents with your name and personal information on them• Stealing: stealing mail (including bills, credit card statements, credit card offers, and tax information), or even stealing wallets and purses to gain access to documents with your personal information on them• Bribing: bribing employees (such as government, bank, or credit card company employees) who have access to your personal information 34
  35. 35. Identity fraud…contd.• Pretexting: using false pretenses to obtain your personal information from banks, phone, credit companies, and other companies• Skimming: using a special storage device to scan and remember your credit and debit card numbers when you use your cards• Phishing: pretending to be a financial institution or other company (like a lotto company) and sending you spam or pop-up advertisements to persuade you to reveal your personal information 35
  36. 36. Identity fraud…contd.• Changing your address: completing a change of address form to divert your billing statements and other mail to another location where this information is easily accessible 36
  37. 37. warning signals• The following is a list of warning signals indicating that you may be a victim of identity theft:• Your credit card statement includes purchases you didnt make or your bank statement includes withdrawals you didn’t make• You receive a credit card that you did not apply for• You are denied credit or offered less favorable credit than your past spending deserves 37
  38. 38. warning signals• You get a denial of credit that you didnt apply for• You receive credit card or bank statements in your name but you do not hold the account theyre billing you for• You no longer receive credit card, bank, or utilities statements.• You applied for a credit card or bank account but you are not getting a card or statements 38
  39. 39. warning signals• You notice some of your mail is missing• You receive notice of a mail redirection request you didnt make• You receive bills from companies you dont recognize• There are credit cards or loans that you didnt open listed on your credit history• Your credit report reveals inquiries from companies you never dealt with• Debt collection companies try to collect debts that arent yours• You are arrested for a crime you didnt commit 39
  40. 40. COMPUTER FRAUDS• Computer fraud is the use of information technology to commit fraud• Types of computer fraud vary and can be complex or simple. Simple types of fraud might include:• Sending hoax emails intended to scare people.• Illegally using someone else’s computer or “posing” as someone else on the Internet.• Using spyware to gather information about people. 40
  41. 41. Computer frauds• Emails requesting money in return for “small deposits.”• Pyramid schemes or investment schemes via computer with the intent to take and use someone else’s money.• Emails attempting to gather personal information to be used to access and use credit cards or social security numbers.• Using someone else’s computer to access personal information with the intent to use such fraudulently 41
  42. 42. Computer frauds• Using the computer to solicit minors into sexual alliances.• Violating copyright laws by copying information with the intent to sell information, like DVDs, CDs.• Hacking into computer systems to gather large amounts of information for illegal purposes.• Hacking into or illegally using a computer to change information, such as grades, work reports, etc. 42
  43. 43. Computer frauds• Sending computer viruses or worms with the intent to destroy or ruin someone else’s computer.• Even though there are stiff penalties for committing computer fraud, laws governing against it may be difficult to enforce. 43
  44. 44. Computer frauds• Do not give personal information to anyone or to any company you’ve never heard of before. This includes your full name, your address, your phone number, credit card number, social security numbers, or information about the people in your household.• Do not pay attention to get rich quick schemes. If they seem too good to be true, they absolutely are 44
  45. 45. Computer frauds• Do not open emails from strangers. Install anti-viral software and spam blocking programs on your computer and your email program.• Don’t download attachments from people you don’t know.• Teach your children about safe communication on the Internet to protect them from Internet predators.• Don’t keep passwords on your computer, and do not use common passwords like the names of your kids, birthdays, or other guessable words. Never give your password to someone else. 45
  46. 46. Corruption in Public Procurement• Corruption is defined by the World Bank and Transparency International (TI) as “the misuse of public office for private gain.” As such, it involves the improper and unlawful behavior of public-service officials, both politicians and civil servants, whose positions create opportunities for the diversion of money and assets from government to themselves and their accomplices 46
  47. 47. Supply and Demand of Corruption• There are two widely-acknowledged dimensions of corruption—supply and demand-side.• Supply- side is the private sector that gifts or bribes the government officials who, in turn, constitutes the demand-side or the receivers 47
  48. 48. Supply and Demand of Corruption• Over the past two decades, anti-corruption measures have targeted only the demand-side either by limiting the government officials’ vulnerability to bribes or in-kind gifts through enactment of laws or by empowering the people through advocacy against the demand- side corruption. 48
  49. 49. Supply and Demand of Corruption• legal measures against the demand-side corruption are important in their own right,• we have often ignored the role of the private sector as a supplier of corrupt payments and a vulnerable sector for corruption itself 49
  50. 50. Who Corrupts• Previously, the private sector believed that corruption exists because the government officials are corrupt and did not consider itself as encouraging corruption.• Over the years, the private sector has been established as an equal participant in corruption transaction, and efforts to limit its ability and vulnerability to engage in corruption are therefore, equally and urgently needed 50
  51. 51. Who Corrupts• As corruption takes place at the interface of the public and private sector, bringing one into the legal net and leaving out the other has made our anti-corruption fight one-sided.• We have seen many corporate corruption scandals over the years. But, a few of them have come under the judicial hammer 51
  52. 52. Who Corrupts• And in most of these cases, supply-side is hardly or inadequately penalized for the offence due to lack of a concrete policy.• Taking into account the rapidly changing forms of corruption, we need to address the corruption in and by the private sector as seriously as in the public sector by widening the legal nets to tackle the menace 52
  53. 53. Who Corrupts• Corruption has become so rampant that we now need to review the existing laws to prosecute even the bribers and the corporate corruption• Africa is no exception to this phenomenon as majority of the anti-corruption interventions worldwide have focused on the demand-side only.• Though the supply-side doesn’t adequately figure in anti-corruption discourse, it has now become imperative to address this almost ignored dimension by mainstreaming it in governance policies and laws 53
  54. 54. What causes and fuels corruption• Corruption distorts resource allocation and government performance. The causes are many and vary from one country to the next. Among the contributing factors are:• Policies, programs and activities that are poorly conceived and managed,• Failing institutions,• Poverty and Deprivation• Income disparities,• Inadequate civil servants’ remuneration,• Lack of accountability and transparency.• Political and or Economic Brigandage 54
  55. 55. EXAMPLES OF CORRUPTION AT VARIOUS STAGES OF PROCUREMENT• Pre-qualification and tender• 1. Loser’s fee• 2. Price fixing• 3. Manipulation of pre-qualification• 4. Bribery to obtain main contract award• 5. Bribery during sub-contract procurement• 6. Corruptly negotiated contract 55
  56. 56. EXAMPLES OF CORRUPTION AT VARIOUS STAGES OF PROCUREMENT• 7. Manipulation of design• 8. Specification of overly sophisticated design• 9. Inflation of resources and time requirements• 10. Obtaining a quotation only for price comparison• 11. Concealment of financial status 56
  57. 57. EXAMPLES OF CORRUPTION AT VARIOUS STAGES OF PROCUREMENT• 12. Intention to withhold payment• 13. Submission of false quotation• 14. Falsely obtaining export credit insurance 57
  58. 58. EXAMPLES OF CORRUPTION AT VARIOUS STAGES OF PROCUREMENT• Project execution• 15. False invoicing: supply of inferior materials• 16. False invoicing: supply of less equipment• 17. False work certificates• 18. Excessive repair work• 19. Overstating man-day requirements• 20. Inflated claim for variation (1)• 21. Inflated claim for variation (2) 58
  59. 59. EXAMPLES OF CORRUPTION AT VARIOUS STAGES OF PROCUREMENT• . False variation claim• 23. Issue of false delay certificate• 24. False extension of time application• 25. False assurance that payment will be made• 26. Delayed issue of payment certificates• 27. Concealing defects (1)• 28. Concealing defects (2 59
  60. 60. EXAMPLES OF CORRUPTION AT VARIOUS STAGES OF PROCUREMENT• 29. Set-off of false rectification costs• 30. Refusal to issue final certificate• 31. Requirement to accept lower payment than is due• 32. Extortion by client’s representative• 33. Facilitation payment• 34. Overstating of profits• 35. False job application 60
  61. 61. EXAMPLES OF CORRUPTION AT VARIOUS STAGES OF PROCUREMENT• Dispute resolution• 36. Submission of incorrect contract claims• 37. Concealment of documents• 38. Submission of false supporting documents• 39. Supply of false witness evidence• 40. Supply of false expert evidence• 41. Bribery of witness• 42. Blackmail of witness 61
  62. 62. EXAMPLES OF CORRUPTION AT VARIOUS STAGES OF PROCUREMENT• 43. False information as to financial status• 44. False statement as to settlement sum• 45. Over-manning by law firm• 46. Excessive billing by lawyer• 47. Complicity by lawyer 62
  64. 64. Pressure or Incentive• Perceived need is often created by expensive addictions such as substance abuse, sex addiction, gambling addiction, and spending addiction.• Typically, a person committing fraud has an incentive or is under some sort of financial pressure.• There may be an unexpected financial crisis in the family or the individual may be living beyond her/his means 64
  65. 65. Pressure or Incentive The four Bs of perceived need:• Beer,• Boobs,• Betting,• Borrowing. 65
  66. 66. Pressure or Incentive• Once begun, the fraud typically continues, and even grows.• The fraudster gains confidence and becomes accustomed to the enhanced financial situation.• Many fraudsters initially tell themselves that the scheme is only temporary.• Once the current crisis (or after whatever drove the perpetrator to hatch the scheme in the first place) has passed, the illegal activity will stop• The fraudster becomes confident and typically enlarges the scam. 66
  67. 67. Rationalization• Fraudsters must be able to rationalize their schemes to themselves or embrace an attitude that the fraud is somehow justified; thus, rationalization or attitude is a factor typically found in a fraud situation• People who commit fraud may be able to convince themselves that the wrongdoing is only temporary and will stop when the financial crisis does 67
  68. 68. Rationalization• People who commit fraud might feel that they need the money more than the entity.• Somehow, they are justified in taking the money or goods or services.• They might believe that they deserve the extra money, perhaps to right a perceived injustice 68
  69. 69. Opportunity• This is one area that companies have the ability to control.• Opportunity is the means to steal when there is inadequate system of internal control and segregation of duties.• where suitable controls are in place, the individual may be able to override the system 69
  70. 70. OCCUPATIONAL FRAUD• The term "occupational fraud and abuse" is broadly defined as "the use of ones occupation for personal enrichment through the deliberate misuse or misapplication of the employing organizations resources or assets” 70
  71. 71. LARCENY• Larceny, according to Blacks Law Dictionary, is "felonious stealing, taking and carrying, leading, riding, or driving away with another persons property, with the intent to convert it or to deprive the owner thereof.• The key element in a larceny scheme is the fact that there is no effort to cover up the theft.• Unlike the skimming schemes, the cash has already been recorded on the books. 71
  72. 72. SKIMMING• "Skimming" is the embezzlement of cash from an entity prior to its being recorded on the books 72
  73. 73. DAY 3• Welcome to the 3rd Day:• Interviewing for Fraud in the Audit Process• Fraud Investigation• Interviewing Fraud Suspects• Free discussion on all the topics, question and answer 73
  74. 74. INTERVIEWING FOR FRAUD IN THE AUDIT PROCESSWHAT THE STANDARDS SAY• Statement of Auditing Standards (SAS) no. 1, Responsibilities and Functions of the Independent Auditor, says, “The auditor has responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.” 74
  75. 75. WHAT THE STANDARD SAYS• SAS no. 99, Consideration of Fraud in a Financial Statement Audit, reiterates that concept and places a heavy emphasis on making inquiries. Paragraphs 20 through 26 enumerate those questions that Auditors should ask management in checking for fraud risk. 75
  76. 76. WHAT THE STANDARD SAYS• Paragraph 27 is clear: “The auditor should be aware when evaluating management’s responses to inquiries…that management is often in the best position to perpetrate fraud.”• Indeed, therein lies the challenge: Some people in positions of trust commit wrongdoing, and those committing wrongful acts and fraud can—and do— lie to auditors and/or managers/investigators. 76
  77. 77. Interviewing for fraud in the audit process• Interviews are a useful audit tool to gather information about internal controls and fraud risks for several reasons.• First, employees involved in the day-to-day operations of a functional area possess the best knowledge of that area.• They are in an excellent position to identify weak internal controls and fraud risks 77
  78. 78. Interviewing for fraud in the audit process• Second, although most employees are not directly involved in fraud, they may have knowledge of suspected, or actual, frauds that interviews can bring to light.• Third, employees may be reluctant to tell management about needed internal controls and suspected or actual fraud, even when a company has an ethics hotline, a compliance officer, or other reporting mechanisms. 78
  79. 79. The Information Needed In Audit Process• A primary difference between SAS 82 and SAS 99, which superseded it, is that the latter includes expanded requirements for inquiries of management.• Making inquiries of management is important because senior management is often in the best position to perpetrate and conceal fraud. 79
  80. 80. Information• In obtaining information necessary to identify the risk of fraud in a financial statement audit, SAS 99 requires auditors to ask the following questions:• Does management communicate its views on ethical business behavior to its employees?• Does management have programs and internal controls designed to prevent, deter, and detect fraud? 80
  81. 81. Information ..contd.• Does management discuss with the audit committee of the board of directors how its internal control system serves to prevent, detect, and deter fraud?• Does management understand the fraud risks specific to its business?• Does management monitor fraud risks relevant to specific components or divisions within the entity?• Does management have any knowledge or suspicion of fraud?• Is management aware of any allegations of fraud? 81
  82. 82. Information ..contd.• In addition to management inquiries, SAS 99 also requires an auditor to inquire of the audit committee and of internal audit personnel about their views on the company’s fraud risks.• Significantly, SAS 99 mandates that other individuals within the company also be questioned about the risk of fraud 82
  83. 83. Information ..contd.Paragraph 24 of SAS 99 states:• The auditor should use professional judgment to determine those others within the entity to whom inquiries should be directed and the extent of such inquiries.• In making this determination, the auditor should consider whether others within the entity may be able to provide information that will be helpful to the auditor in identifying risk of material misstatement due to fraud. 83
  84. 84. Information ..contd.• SAS 99 suggests that auditors inquire of operating personnel with varying levels of authority, of in-house legal counsel, and of others knowledgeable of fraud risk.• Because employees are often aware of where specific fraud risks lie, auditors should understand employees’ views on the risk of fraud. 84
  85. 85. Information ..contd.• Auditors should look for discrepancies in information received from various interviewees.• Unusual situations or conditions identified through interviews with management and others can be revealing 85
  86. 86. Interview Subjects• SAS 99, paragraph 6, identifies the two types of fraud that auditors should be aware of as “misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets.”• As a result, inquiries should be directed toward individuals concerned with financial reporting as well as those with direct or indirect access to the company’s assets 86
  87. 87. Interview Subjects• The CEO and the CFO should be carefully interviewed by a partner or experienced audit manager about their knowledge or suspicion of fraud.• These executives have the power to override internal controls, and therefore are in a position to perpetrate and conceal fraud.• Their administrative assistants may be privy to sensitive information and may suspect or be aware of fraudulent activity, and should also be interviewed.• Individuals may be aware of fraudulent activities but not disclose them unless specifically asked 87
  88. 88. FRAUD INVESTIGATION• A fraud investigation can cover a wide variety of issues and actions• Fraud investigations and forensic enquires may not involve actual fraud or corrupt behavior but may instead be concerned with a breach of company policy, a problem with health and safety, harassment, or an investigation into security 88
  89. 89. FRAUD INVESTIGATION• Fraud itself is defined as a misrepresentation that is intended to deceive a person or business.• Companies can be accused of fraud if they make claims about a product they sell that are untrue or made up only in order to make a profit.• Fraud investigations are carried out to determine whether fraud has taken place or whether there is evidence of the fraud 89
  90. 90. FRAUD INVESTIGATION• Fraud can cause serious problems not only concerning loss of money but physical harm to people and harm to reputations.• Fraudulent behavior or unethical actions can impact strongly on a business.• Unethical behavior can bring emotional as well as financial trauma from which a business may take years to recover 90
  91. 91. FRAUD INVESTIGATION• Fraud investigations cover a number of procedures, including the thorough analysis of electronic data.• Computer forensics is vitally important when dealing with fraudulent or unethical actions in businesses today.• It can reveal evidence that would otherwise never have come to light — evidence can be hidden within mountains of electronic data, and only professional computer forensic investigators will be able to uncover it 91
  92. 92. FRAUD INVESTIGATION• Computer forensics is one of the first procedures to be carried out in a fraud investigation — making sure that dates and time stamps on files are not changed, and that critical information is not overwritten.• A fraud investigation should always be carried out from an objective position and supported by documented evidence.• The investigation should be carried out by a neutral professional, so that the company can ensure it is seen to be complying with a commitment to objectivity. 92
  93. 93. INVESTIGATION AND EXPERT WITNESS TESTIMONY• Forensic Accountants are often called upon to initiate a fraud investigation for the primary purpose of determining whether a fraud has occurred.• Other reasons for initiating a fraud investigation include the following: a tip or concern received (from an employee, a vendor, a customer, or other source), an accidental discovery, fraud uncovered as a result of an audit, or a concern from the business as to the adequacy of their internal controls system. 93
  94. 94. Fraud InvestigationA fraud investigation is the systematic examination to obtain the truth as to:1. Whether a fraud has occurred2. Who is involved3. How it was perpetrated4. How much is involved 94
  95. 95. Fraud Investigation versus Accounting Audit Target Purpose Techniques Required Employed StandardsFinancial Examination of Express an Audit SAS No.99Statement financial data, opinion on sampling, requiresAudit i.e. financial the financial examination auditors to statements data i.e. of financial approach financial data, audits using statements confirmation professional skepticismFraud Resolve one Determine if Sufficiency ofInvestigation or more very fraud has proof in order specific occurred, who to either allegations of is involved, prove or fraud and what do disprove the they know fraud 95 allegation
  96. 96. Difference between the two• The differences between forensic accounting/fraud investigation and auditing can be explained by how they vary by• scope,• nature,• purpose,• frequency,• methods used,• and presumption. 96
  97. 97. Steps in Conducting a Fraud InvestigationThere are five key steps in conducting the investigation:• -gathering record,• -looking for patterns,• -determining possible fraud theories,• - interviewing witnesses,• - and the report. 97
  98. 98. Gather the Records• Forensic accountants are well-acquainted with the activities of this step, mainly to gather documents used within the organization.• Records would include vendor invoices, customer invoices, cancelled checks and bank statements, purchase orders and receiving reports. 98
  99. 99. Look for Patterns and Irregularities• After gathering the necessary organizational document, the forensic accountant will review and analyze the documents to look for patterns and irregularities.• The accountant may use analytical procedures, sampling techniques, and ratio analysis in order to determine if patterns or irregularities exist within the data 99
  100. 100. Determine Possible Fraud Theories• After inspecting and analyzing the documents, the forensic accountant will be able to develop a possible fraud theory (or multiple theories).• The theory will identify potential schemes and methods used.• As theories are developed, the accountant will need to “test” the theory to determine likely scenarios for the fraud. 100
  101. 101. Interview the witnesses• This step is undertaken usually to support an allegation of fraud.• Before beginning this step, the forensic accountant should recommend that the clients advise their legal counsel.• There may be additional considerations to include, for which the attorney can be a resource. 101
  102. 102. Fraud Interview Questions• A fraud interview is nothing more than a structured meeting in which questions are designed to elicit information from witnesses.• The interviewer may be scheduled to ask only one question, but more often, the interview is comprised of a series of questions.• There is an art to asking questions, and the means to acquiring the artful skill is through practice. 102
  103. 103. --• Fraud examiners should conduct the interview in a manner so as to ensure the individuals privacy, and the interview should be conducted under reasonable circumstances.• They must ensure that they are not accusing the individual of the fraud in the course of the interview 103
  104. 104. --• The fraud examiner should be direct in asking the subject specifically if she/he has committed the fraud.• If the case should go to litigation and the examiner is attacked professionally, she/he would be able to respond that all individuals in question, during the course of the investigation, were asked if they were involved with the fraud.• This establishes that the fraud examiner did not avoid her/his professional responsibility 104
  105. 105. INTERVIEWING FRAUD SUSPECTSGood Fraud Interview• A good interview should be succinct, but last long enough to disclose the significant facts.• The interview should also occur as soon after the event as possible, in order to avoid losing key details.• The interview should be conducted privately, so that others can neither hear nor observe the interview. 105
  106. 106. Seven key attributes of an interviewer• Organized• Engaged• Thoughtful• Listening• Flexible• Observant• Non-Threatening 106
  107. 107. Understanding Body LanguageThe following is a list of some physical indicators:1. Placing hand in front of mouth when speaking2. Excessive blinking or blinking too quickly3. Frequent touching of the nose (the nose is especially sensitive to stress)4. Raising of eyebrows5. Crossing of arms or legs 107
  108. 108. --6. Lack of eye contact (or an excess of eye contact)7. Tapping of fingers feet8. Frequent swallowing9. Constant touching of hands to face or head10. Holding tightly to arms of chair11. Sweating12. Shifting posture 108
  109. 109. The End Thank you for your:• Time• Interest and• Attention 109